FASB and IASB Not Ready to Agree on Impairment

The Financial Accounting Standards Board (FASB), the US accounting body, announced in a joint meeting with the International Accounting Standards Board (IASB) on July 17 that it had not voted to release a joint Exposure Draft on accounting for loan losses. The two boards were expected to release the Exposure Draft soon after the joint meeting. The new method for accounting for loan impairment was a portion of the Accounting for Financial Instruments project that will result in a converged accounting standard.

In a prepared statement, FASB chairman Leslie Seidman said that during outreach meetings attended by stakeholders and FASB board members and staff, "pervasive questions have been raised in the United States about the appropriate interpretation of the proposal. The FASB still strongly desires to achieve a converged standard with the IASB on impairment; however, we believe it is essential that we address the questions that have been raised in the United States before moving forward with an Exposure Draft, so that we are confident that the proposal would result in an improvement in financial reporting."

Hans Hoogervorst, chairman of the IASB, expressed his frustration with FASB's decision to conduct further outreach, according to a transcript of the meeting obtained by Compliance Week: "I would also like to say that, if this is going to unravel, I find it for us as standard setters, not just us but also for you, I think it is deeply embarrassing. That in three efforts, in which we have looked at at least ten alternatives, in which we have left no stone unturned, that after three years we are still not able to come up with an answer. I would really find that unacceptable."

Under most accounting systems in use today, banks need evidence that a loan or bond is not performing before they set aside money to cover losses. The FASB "Statement on FASB and IASB Impairment Discussions" reads: "Previously, the Boards had agreed on a so-called 'expected loss' approach that would track the deterioration of the credit risk of loans and other financial assets in three 'buckets' of severity. Under this model, organizations would assign to 'Bucket 1' financial assets that have not yet demonstrated deterioration in credit quality. 'Bucket 2' and 'Bucket 3' would be assigned financial assets that have demonstrated significant deterioration since their acquisition."

During the meeting of the two boards, according to the prepared statement, the FASB staff reported that in outreach meetings with US stakeholders, "questions have been raised about the application of the 'Bucket 1' measurement objective of 'expected losses relating to a loss event that is expected in the next twelve months.' Some stakeholders also have expressed concern that, under this proposal, reserves for loan portfolios may not reflect the appropriate amount of risk. For example, some stakeholders believe that the proposal would likely result in lower reserves for portions of loan portfolios. In addition, stakeholders raised questions about the proposed guidance for determining when financial assets should be transferred to 'Bucket 2,' which requires an estimate of 'lifetime' expected losses'."

The FASB and the IASB are continuing to work in an apparently amicable manner on other major convergence projects, including accounting for leases. The loan/loss disagreement followed the publication of a widely discussed Securities and Exchange Commission Final Staff Report that said, "there appears to be relatively less support within the US financial reporting community for the designation of the standards of the IASB as authoritative for use by US issuers for domestic reporting purposes."